Online Sales Tax: A Guide to Economic Nexus & Ecommerce

On June 21, 2018, South Dakota v. Wayfair, Inc. overturned a 1992 Supreme Court ruling; states can now require ecommerce businesses to pay sales taxes where those businesses have an economic presence (or nexus)

The process of tracking individual state sales taxes that enforce economic nexus can be daunting, time-consuming, and expensive

“With many remote employees located in different states, we take our nexus very seriously. Avalara has significantly reduced the administrative complexity of a remote working company.” — Lisa Bradley, co-founder & CMO of R. Riveter

There’s a common accounting mistake that many ecommerce businesses unknowingly make that can cost millions of dollars and even lead to bankruptcy.

If your ecommerce business sells to customers all over the United States and is in hyper-growth mode, you’re going to want to keep reading … or you might face an unexpected lawsuit.

On June 21 of this year, the U.S. Supreme Court ruled that states are within their constitutional rights to collect sales taxes on purchases made from out-of-state online retailers.

The South Dakota v. Wayfair decision overturned a 1992 ruling, known as Quill, that prohibited states from charging sales taxes to companies that don’t have a physical presence within the state.

Because of this new ruling, your business is now on the hook for tracking and paying sales tax in every state in which you meet the threshold for economic nexus. If that isn’t stressful enough, each state has its own set of rules for sales tax.

Worse: in some states, counties and cities also have this power — meaning that businesses will need to understand and continually stay up to date as laws change across over 12,000 jurisdictions in the U.S.

Keeping track of each individual state’s specific sales tax laws and economic nexus thresholds — and ensuring that your business doesn’t get sued — can be an expensive, ongoing challenge.

1. Understand Why States Want to Enforce New Tax Laws

Before ecommerce, remote sellers in the U.S. were mostly catalog retailers, accepting orders through the mail and via telephone. They only collected and paid sales tax on transactions with buyers in states where they had a physical location.

Then, North Dakota passed a law in the 1990s requiring sales tax collection from all retailers that advertised to customers in the state. Quill Corp. was a Delaware catalog retailer selling office supplies with locations in Illinois, California, and Georgia. The company sold office supplies to North Dakota customers by phone and mail order and shipped catalogs to residents.

Quill refused to pay the sales tax, and North Dakota sued. The result was a Supreme Court ruling: Quill didn’t have to collect sales tax from North Dakota customers — neither did any other company that didn’t have a substantial physical presence in the state.

Back in 1992, remote sales accounted for only a small fraction of total retail and few people even had an email address or shopped online. Even a decade after Quill, in 2002, ecommerce still only amounted to $42 billion in the U.S.

Amazon saw the Quill decision as an opportunity to grow without tax regulations that could hamper the growth of traditional retailers. As long as it didn’t maintain a physical presence in a state, Amazon didn’t have to charge and remit sales tax to the over 12,000 sales tax jurisdictions in the U.S.

Quill had another benefit for Amazon: consumers realized they could save a little money from websites that didn’t charge sales tax, bringing more shoppers online. As a result, a rumor quickly spread that ecommerce transactions from out-of-state businesses were tax-free.

In reality, consumers are supposed to pay use tax on these sales, but almost none did. Sales tax revenue losses amounted to billions.

Something had to give. Taxes would need to be increased significantly, critical state services would need to be cut, or somehow — in spite of Quill — ecommerce sales would have to be taxed.

The recent South Dakota v. Wayfair decision means that your online business could now be liable for paying sales tax on orders made in states and counties where you do not have a physical presence but do have an economic presence (or nexus).

The “economic nexus criteria” used by states to determine whether a retailer is liable for sales tax varies by state, but all help to level the playing field between non-collecting out-of-state sellers and the brick-and-mortar retailers located within.

For example, a remote seller (online or offline) in South Dakota will trigger economic nexus when they generate $100,000 in taxable sales or 200 separate taxable sales transactions delivered into the state during the current or previous calendar year. Yet, Ohio’s economic nexus law only applies to merchants that sell over $500,000 of taxable receipts into the state.

You can also trigger nexus in some jurisdictions if you’re using affiliate linking to sell products. Drop shipping programs like Fulfillment By Amazon (FBA) can make you responsible for collecting and filing in states like Texas and Florida. In addition, nexus can be established by attending trade shows, or by having an employee in another state doing anything business-related (even checking email).

That’s why it’s important to monitor the new law’s individual requirements and your transactions in each state.

States with economic nexus can present a major risk for fast-growing companies. The media is likely to cover the success of your business … and auditors are going to read about it.

In states like New York, whistleblower lawsuits make it profitable for attorneys to sue the non-compliant. So, what can you do to avoid this situation?

3. Learn the State-by-State Economic Nexus Laws

Without a solid understanding of state-by-state sales tax laws, you leave your business vulnerable to audit, fines, and repayment. And lawsuits can strike when you least expect it.

That’s why you must learn the specific tax laws for each state in which you sell for your ecommerce business.

You can start by understanding “sourcing,” or the location where a sale is taxed.

“Origin-sourced sales are taxed where the seller is located, while destination-sourced sales are taxed at the location where the buyer takes possession of the item sold. As a seller, it is important to know whether you are located in an origin-sourced state or a destination-sourced state.”

Keep in mind, origin and destination sourcing rules work differently if you are a remote seller and have economic nexus. Those sales will most likely be destination-based. As a result, you’ll need to figure out the right sales tax rate for every location where your business has nexus.

And as your business grows, so too will your customer base, resulting in an increase in states where you have an obligation to collect sales tax.

Thankfully, if you sell to customers in a state where you don’t have nexus, you don’t have to collect sales taxes. Unfortunately, there are only a handful of states that have yet to enforce economic nexus law.

4. Ensure Your Ecommerce Business Is Nexus Compliant

Many companies start by complying with sales tax laws manually, using Department of Revenue notices for one or two states where they know they are required to file.

Unfortunately, this method doesn’t scale. What took just a few hours a month with one state could take 20 hours or more once a business’s collection obligations expand due to trade show attendance, fulfillment by Amazon, drop shipping, or economic nexus.

Here’s the reality: growth happens — as can state sales tax complications and lawsuits — whether your business is ready or not.

To avoid the risk of an expensive, difficult audit, a different kind of solution is needed. You could hire someone full-time to manage this for you in-house, but not all businesses have the budget to do so.

There is another way …

5. Automate State Sales Tax Bookkeeping and Payments

Scalable, cloud-based solutions like Avalara offer up-to-the-minute calculation accuracy, geolocation to pinpoint districts and rates, and automated filing. Avalara works with Shopify Plus to get sales taxes right, whether you’re filing in one state or dozens — even from outside the U.S.

Automation saves time and lowers risk. That’s a great combination, since taking risks with sales tax can never legally result in higher profits.

“If we actually just had an individual person who was trying to figure out what taxes we needed to charge where, that would probably be a full-time job for someone,” says Lynn Wilsey, director of information technology, MusclePharm.

“I would say that the biggest benefit is that we save probably an entire employee. The entire time that somebody would have to spend doing this.”

Wilsey adds that Shopify’s Avalara functionality is built-in, so it makes it a lot easier for someone who's not a web developer to be able to go in and tweak things.

That helped to cut MusclePharm’s operating costs substantially, and for Wilsey the appeal to migration grew. He says …

“When we found out there was a direct integration of Avalara with Shopify, it was just like the icing on the cake. It was just an added bonus for why we decided to migrate.”

When collection and filing are automated, your ecommerce business doesn’t have to avoid growth strategies that complicate your sales tax picture — you can expand where, when, and how you want, without the red tape and hassle.

“If you are a current Shopify Plus customer and you have not activated Avalara tax software, you don’t know what you’re missing. You will save time, you will save money, you will get extra sleep at night if you start to use that going forward. You will not regret it,” says Robin Hecht, controller, Boll & Branch.

“With our advisor’s help, as well as Avalara’s help, we have now figured out that we need to register in 20 more states since (the) Wayfair (ruling). I’m very confident the registrations and filing will go smoothly and it will be a quick check at the end of the month.”

To learn more about how automation can help to simplify sales taxes for your ecommerce business, visit Avalara’s website.

Arizona is an origin state for sellers with nexus, and if the order originates from within Arizona.

If a merchant is an out of state seller, then it has nexus when selling into Arizona. So, you must also register with the local jurisdictions you are selling into and charge destination taxes.

Transaction Privilege Tax (TPT) is a tax on the privilege of doing business in Arizona. Much like sales tax in the rest of the country, TPT is collected by merchants and remitted back to the state based on a percentage of a sale.

Simplified Sellers Use Tax is also a concept in Arizona for out of state sellers that have nexus in Arizona. If a seller does not have nexus, customers are still required to pay use tax for online purchases but must remit it themselves.

California is a hybrid origin state. That means that any city, county, or state taxes will be based on the seller’s location, while any district taxes are applied based on the customer’s location. That said, it’s also acceptable to collect all destination taxes on an order — it is called “courtesy collection.” (Note: Shopify does not currently support this.)

Any retailer that has substantial nexus with this state for purposes of the commerce clause of the U.S. Constitution or any retailer upon whom federal law permits this state to impose a use tax collection duty.

Confusing, right? Substantial nexus is defined as being “engaged in business,” which includes but is not limited to:

A person working for you (e.g., reps, agents, salespeople, canvassers, contractors, solicitors operating in this state under the authority of the retailer or its subsidiary for the purpose of selling, delivering, installing, assembling, or the taking of orders for any tangible personal property)

An affiliate (e.g., “click-through” nexus) which includes people who directly or indirectly refer potential purchasers of tangible personal property who are being paid a commission for these services

Affiliate Nexus Threshold: Nexus occurs when sales from affiliates exceed $10,000 in the preceding 12 months and total in-state sales exceed $1 million in the preceding 12 months

Presence at a trade show (e.g., making sales at a trade show may constitute nexus, but if the retailer had a physical presence at a convention or trade show for 15 or fewer days in any 12 month period and did not derive more than $100,000 of net income from these activities in the prior calendar year, nexus is not established)

Note: sellers are still required to collect use tax when at a trade show

Shipping is not taxable in California if you are passing on the cost of shipping, and charge it as a separate line.

Shipping is taxable in California if you use a combined line for shipping and handling

Colorado is a destination state for sellers with nexus. The state considers a seller to have sales tax nexus if you have any of the following:

An office, distributing house, sales room or house, warehouse, or other places of business

Independent contractors or other representatives in Colorado soliciting business

For sellers with locations, Colorado is broken down into districts. As a seller in Colorado, you must charge state tax and any district taxes relating to the location of your buyer.

For merchants selling into Colorado, without nexus and selling over $100,000 a year, you must do the following:

Along with every transaction to a Colorado buyer, provide a notice that use tax is due on the sale

Each year, provide customers who purchased more than $500 from you with an annual summary of their purchases to help them pay use tax due and provide this information to the Colorado Department of Revenue

Colorado taxes shipping if the charge is inseparable from the purchase. This means, if there's an option for pickup or alternative delivery, you don't have to charge taxes. This is not the case for most online sales, and as such shipping is generally taxable.

Economic Nexus Threshold: $100,000/year in gross revenue or 200 or more separate transactions on the previous or current calendar year’s sales.

This 4% tax is applied to a seller’s total receipts. It is often passed on to the buyer, like a sales tax would be. However, merchants are allowed to charge 4.167%, (or 4.712% on Oahu) to buyers to cover the amount the government would take, since this tax applies to total receipts, including the tax collected.

This also means shipping is taxable in Hawaii.

Economic Nexus Threshold: $100,000/year in gross revenue, or makes sales into Hawaii in more than 200 separate transactions in the previous or current calendar year.

Idaho is a destination state. Idaho considers a seller to have sales tax nexus if you have any of the following in the state:

An office, warehouse, sales or sample room, or storage place

A stock of goods

Renting or leasing property (other than real property) to a customer who uses the property in Idaho

Business servicing tangible personal property in Idaho

A salesman, agent, or representative who comes to Idaho to sell, deliver, install, or take orders (it doesn’t matter whether the salesman, agent, or representative is your employee, or whether they live in Idaho or another state)

Shipping is not taxable in Idaho if it's stated separately on the bill

If you don't have a location in Idaho, but have nexus, you only charge the 6% state tax at the destination.

Iowa is a destination state. Merchants with nexus and a location in state should charge taxes based on the destination of the buyer. For out of state sellers with nexus, only the state rate of 6% applies.

Iowa considers a seller to have nexus if you have any of the following in the state:

An office, warehouse, distribution house or place of business

An employee, contractor or another representative in Iowa, either temporarily or permanently

Installs property it sold in Iowa

A construction contractor performs a job in Iowa

Regularly engages in the delivery of products to Iowa

Shipping is generally not taxable in Iowa unless you roll the shipping into the product price.

Economic Nexus Threshold (Starting Jan. 1, 2019): $100,000/year in gross revenue, or makes sales into Iowa in more than 200 separate transactions in the previous or current calendar year.

Louisiana for all intents and purposes is a destination state. The problem is that sellers must register with each jurisdiction if they have to charge tax there, and these jurisdictions may have different rules on who has nexus, and when, based on physical location or ecomonic nexus. This means it's hard to determine automatic rules, even based on nexus.

Louisiana is also a notice and report state, which means that out of state merchants must place a notification at checkout that the customer may need to report their purchase and file for use tax.

Shipping taxes are not taxable if the following conditions are met:

List the shipping and handling charges separately from the charges for goods on the invoice

Allow the buyer, if they so choose, to pick up their item from the seller

When ordering a product for a buyer from another seller, have that seller ship directly to the customer — so the buyer won’t have to pay you the sales tax on shipping and handling

Economic Nexus Threshold: $100,000/year in gross revenue, or makes sales into Louisiana in more than 200 separate transactions in the previous or current calendar year.

Maine enforces a single tax rate across the state and not local jurisdictions. So, for all intents and purposes, it can be considered a destination state.

Maine considers a seller to have sales tax nexus if you have any of the following in the state:

Allow the buyer, if they so choose, to pick up an item from the seller

A store, office, warehouse, repair facility or other places of business

An employee, salesperson, contractor or another representative

If stated separately, shipping is not taxable.

Economic Nexus Threshold: $100,000 in gross revenue in the previous or current calendar year. Or, if the business generates more than 200 separate sales transactions in the state of Maine during the previous or current calendar year.

Michigan is a destination state with no local tax rates. Michigan considers a seller to have sales tax nexus in the state if you “sell tangible personal property to a consumer.” This means whether you are in the state, or out of state, you're supposed to collect tax if selling into Michigan.

Shipping is taxable.

Economic Nexus Threshold: $100,000 in gross revenue in the last calendar year or makes sales into Michigan in more than 200 separate transactions in the previous calendar year.

Minnesota is a destination state. Minnesota considers a seller to have sales tax nexus if you have any of the following in the state:

Have an office; distribution, sales, or sample room location; warehouse or other places of business in Minnesota, either directly or by a subsidiary

Have a representative, agent, salesperson, canvasser, or solicitor in Minnesota, on either a permanent or temporary basis, who operates under the authority of the retailer or its subsidiary for any purpose, such as: repairing, selling, delivering, installing, soliciting orders for the retailer’s goods or services, or leasing tangible items in Minnesota

Deliver items into Minnesota in their own vehicles

Provide taxable services in Minnesota

Have entered into an agreement with a solicitor for the referral of Minnesota customers for a commission and your gross receipts over 12 months is at least $10,000

Shipping is taxable if items are taxable.

Economic Nexus Threshold: $100,000 in gross revenue or makes more than 100 separate sales transactions in the state of Minnesota over the previous 12 months.

New Jersey is a destination state. New Jersey considers a seller to have sales tax nexus if you have any of the following in the state:

An office or place of business

An employee present in the state

Goods in a warehouse

Ownership of real or personal property

Delivery of merchandise in New Jersey

Independent contractors or other representatives in New Jersey

Provide any maintenance program in New Jersey

New Jersey considers shipping taxable on taxable items. It's also non-taxable on non-taxable items, but you have to break these out separately into two lines. If you only have one line for both types of products, it becomes taxable.

Economic Nexus Threshold: Sales of $100,000 in New Jersey, or more than 200 transactions in the state in the current or last calendar year.

New Mexico is an origin state. New Mexico doesn't actually have a sales tax, it has a gross receipts tax that is often passed on by merchants.

Gross receipts tax nexus in New Mexico can be triggered by a number of factors. The most common include having a physical location (office, warehouse, plant, etc.) within the state, having employees within the state, or conducting marketing activities within the state.

New Mexico is attempting to pass legislation that would compel merchants located outside of New Mexico, who are selling into New Mexico, to pay gross receipts tax on their New Mexico sales.

Ohio is an origin state. Ohio considers a seller to have sales tax nexus if you have any of the following in the state:

A place of business within this state, whether operated by employees or agents of the seller, by a member of an affiliated group of which the seller is a member, or by a franchisee using a trade name of the seller

Employees, agents, representatives, solicitors, installers, repair people, salespeople, or other individuals in Ohio for the purpose of conducting its business

A person in the state for the purpose of receiving or processing orders of its goods or services

Makes regular deliveries of tangible personal property into this state by means other than common carrier (e.g., the out of state seller has goods delivered to this state in vehicles which the out of state seller owns, rents, leases, uses, or maintains or has goods delivered by another member of an affiliated group, of which the out of state seller is a part, acting as a representative of the out of state seller)

Owns tangible personal property that is rented or leased to a consumer in this state, or offers tangible personal property, on approval, to consumers in this state

Owns, rents, leases, maintains, or has the right to use and uses tangible personal or real property that is physically located in this state

Is registered with the secretary of state to do business in this state or is registered or licensed by any state agency, board, or commission to transact business in this state or to make sales to persons in this state

Ohio wants sellers that have nexus in Ohio and who made a sale from outside the state to charge sales tax based on the destination of the buyer.

Oklahoma is a destination state. Oklahoma considers a seller to have sales tax nexus if you have any of the following in the state:

Owns tangible personal property that is rented or leased to a consumer in this state, or offers tangible personal property, on approval, to consumers in this state

An office or place of business

A salesperson, contractor, installer or another representative of the business doing business in the state

Goods in a warehouse, distribution center or other places of business

Delivery of merchandise in Oklahoma in vehicles owned by the taxpayer

If a merchant is not based in Oklahoma, but has sales tax nexus in Oklahoma, they are considered an Oklahoma “remote seller.” This is where things get trickier, since remote sellers are required to collect use tax, which is similar to sales tax, but can vary slightly from Oklahoma sales tax rates.

Shipping is not taxable if stated separately.

Notice and Report Threshold: Sales in Oklahoma of at least $10,000 in the previous 12 months. Sellers who meet the threshold are required to elect to do one of the following on or before June 1st of each calendar year:

Pennsylvania is an origin state. Pennsylvania considers a seller to have sales tax nexus if you have any of the following in the state:

An office or place of business

An employee present in the state

Goods in a warehouse

Ownership of real or personal property

Delivery of merchandise in Pennsylvania

Independent contractors or other representatives in Pennsylvania

Leasing property in the state

Philadelphia and Allegheny County are the only jurisdictions with a local tax in Pennsylvania. Merchants that have nexus in Pennsylvania, but are located out of state, are only responsible for the state tax.

If the items for sale are taxable, then so is the shipping.

Notice and Report Threshold: Sales into Pennsylvania that exceeded $10,000 in the previous 12 month period. Sellers who meet the threshold are required to make an election by Mar. 1 of every year and do one of two things:

Option 1: Register for a Pennsylvania sales tax permit, collect sales tax on sales that ship into Pennsylvania, and remit sales tax to the state.

Utah is an origin state, and local taxes may apply. If purchasing from a merchant that does not have nexus in Utah, customers in the state are responsible for filing their purchases as use tax on their income tax.

Sales tax nexus in Vermont can be triggered by a number of factors. The most common include: having a physical location (office, warehouse, plant, etc.) within the state, having employees within the state, or conducting marketing activities within the state.

More recently, internet commerce has sparked debate over what activities can trigger nexus and where sales tax should be collected.

For example, Fulfillment by Amazon merchants may find their products stored in Amazon warehouses across the country. This presence of physical goods in a state may trigger nexus and expands the complexity of managing sales tax compliance.

Shipping is taxable in Vermont.

Vermont is a notice and report state for merchants located outside of Vermont selling under $100,000 a year. Sellers that generate over $100,000 a year are required to register with the state of Vermont and collect use tax.

Economic Nexus Threshold: Sales of $100,000 or more in the state or at least 200 individual sales transactions into the state.

Washington is a destination state. Sellers that do not have nexus but sell into Washington do have some liability to notice and report, similar to Colorado.

Economic Nexus Threshold: Sales of $100,000 or more into the state or 200 separate transactions into Washington in the current or last calendar year.

According to the state, sellers with sales equal to or exceeding the sales or transaction number thresholds are required to register for a Washington sales tax permit, collect sales tax on sales that ship into Washington, and remit sales tax to the state.

Notice & Report Threshold: Sales of $10,000 or more into the state. According to Washington Notice & Report, sellers who make $10,000 or more in sales to buyers in the state are required to do one of two things:

Option 1: Register for a Washington sales tax permit, collect sales tax on sales that ship into Washington, and remit sales tax to the state.

West Virginia is a destination state. The state uses nine-digit zip codes to delineate different taxation areas.

Sellers from out of state, selling into West Virginia with nexus must apply the appropriate state and local taxes. Sellers selling into West Virginia without nexus are not responsible for collecting tax, but the customer is responsible for remitting use tax on these purchases.